FDI overtakes FII flows

TNN|

Jan 15, 2007, 01.47 AM IST

Happy augury

The Prime Minister���s Economic Advisory Council (EAC) has confirmed anecdotal evidence ��� for the first time in recent years, foreign direct investment (FDI) is likely to exceed foreign institutional investment (FII).

According to the EAC, net FDI for 2006-07 would be around $9 billion, up from $4.7 billion last year while FII or portfolio inflows are likely to be $7 billion. While the close-to-doubling of FDI flows is a happy augury in itself, what is more welcome is the fact that FDI flows are at last set to exceed FII flows.

This is good news. While portfolio flows do bring benefits, FDI is unquestionably superior; the spinoffs are far greater. Portfolio investment tends to be of shorter duration, footloose and fancy-free is how some would put it.

In contrast, FDI tends to be long-term. Investors who come in and set up a car plant or a chip factory, for instance, are unlikely to shut shop and pull out overnight. Unless, of course, there is some very specific and grave provocation as with the Fera (Foreign Exchange Regulation Act) in the late 1970s, that saw many MNCs opt to exit from the country.

But barring such cataclysmic events, FDI tends to be far more ���sticky���. Companies may take much longer before they decide to invest in another country, especially a developing one.

But once they do take the plunge and invest, they are unlikely to exit in a hurry. Predictably, therefore, FDI has huge positive externalities in the form of employment opportunities, addition to GDP, growth of ancillary industries, etc.

Indeed, one of the biggest successes of the Chinese growth model has been its ability to attract prodigious quantities of FDI ��� close to $60 billion a year. China, in fact, has been much more circumspect in opening up its capital market compared to India ��� FII at about $10 billion a year is a fraction of FDI.

Many would point to this as a significant factor responsible for the faster growth of the Chinese economy. But to the extent that overseas investors now seem to have greater confidence in India, as reflected in their willingness to commit their money for a much longer period, it would not be unrealistic to expect that FDI will continue to outstrip FII, and by a progressively larger margin in the coming years.